It’s a jungle out there

But the World Bank is shaming governments into slashing bad rules

A TYPICAL company in Congo with a gross profit margin of 20% faces a tax bill equivalent to 340% of profits. Some survive by slipping the tax collector a few Congolese francs to look the other way. This is nice for tax collectors, but not so good for Congo. Its spirit of enterprise is throttled at birth by ridiculous rules.

Every year since 2003 the International Finance Corporation (part of the World Bank) has compiled a report on red tape around the world. “Doing Business 2012”, which was published on October 20th, reports progress on several fronts.

“Doing Business” does not delve into complicated areas full of tricky trade-offs, such as regulating banks or environmental pollution. Rather, it looks at rules that ought to be simple but often aren't. How long, for example, does it take to register a company? In New Zealand it takes one day and costs 0.4% of the local annual income per head. In Congo it takes 65 days, involves ten steps and costs 551% of income per head.

In Kenya, by no means the most bureaucratic state in Africa, firms that register incur an annual secretarial fee of $220, plus more for lawyers' bills. This discourages small firms from becoming formal, which means they can't borrow money from a bank. Those that register find the paperwork labyrinthine and confusing. “We found it was very hard to see what was ahead of us,” says Alix Grubel, a director of Kenya Buzz, a digital publisher.

Other procedures the IFC measures include registering a property (which takes one day in Portugal, 513 in Kiribati); obtaining a construction permit (five steps in Denmark, 51 in Russia); enforcing a simple contract through the courts (150 days in Singapore, 1,420 in India); and winding up an insolvent firm (creditors in Japan recover 92.7 cents on the dollar, those in Chad get nothing at all).

Although the IFC has not been publishing red-tape league tables for long, it has already shamed most of the world's governments into cutting a few pointless rules (see chart). In the past six years, 94% of the 174 economies surveyed have streamlined at least some processes. In the past year alone, 125 countries implemented reforms. Globally, the average time it takes to register a business has fallen from 50 days to 31 since 2003, and the average cost from 89% of per capita income to 36%. Until recently in Paraguay, companies were obliged to have every page of their accounts stamped with a judge's seal. No longer.

Cutting red tape makes countries richer, if the 873 peer-reviewed articles and 2,332 working papers that use the “Doing Business” data are anything to go by. A study in Mexico found that simplified municipal licensing led to a 5% increase in the number of registered companies and a 2.2% increase in jobs. It also lowered prices for consumers. Bankruptcy reform in Brazil caused the cost of credit to fall by 22%. Countries with flexible labour rules saw real output rise by 17.8% more than those with rigid ones.

And you do not have to be a tea-party fan to agree that some corporate tax rates are too high. To compare apples with apples, the IFC looked at how each country would tax a domestically owned ceramics firm with 60 employees, two plots of land and a pre-tax profit margin of 20%. Five countries (Sri Lanka, Argentina, the Comoros Islands, the Gambia and Congo) would hit such a firm with taxes exceeding 100% of its profits. This is of course self-defeating. When taxes are too high, no one pays them. Bolivia, for example, tries to grab 80% of a firm's profits but ends up raising far less, as a proportion of GDP, than low-tax Chile, which accordingly has much better roads, schools and public health care.

This year's report adds two new measures. One is electricity. A young entrepreneur in Liberia who builds a new warehouse must wait on average 586 days to connect it to the power grid. In Ukraine it takes 274 days; in Germany only 17. Guess which of these countries has a thriving manufacturing sector?

The other new measure is transparency. How easy is it to find out what the rules are, how to comply with them and what it will cost? In most countries in Africa and the Middle East, a businessperson must meet an official face-to-face to discover such things. In more business-friendly places, it is all published online. This not only reduces hassles; it also reduces costs. Where fees are transparent, they tend to be lower. In countries where it is easy to find the documents required to import goods, it takes 21 days on average to import them; in countries where such forms are hidden in a bureaucrat's desk, it takes twice as long.

The IFC singles out several countries for plaudits. Morocco, Moldova and Macedonia improved the most in the past year. South Korea has “sunsetted” more than 600 regulations and 3,500 administrative rules since 2008. Song Yae-ri, the founder of Seoulist, a website that publishes reviews of the hottest food and coolest bars in Seoul, says it was easy to register her firm. “All it took was a trip to the tax office, where I filled out an A4 sheet of paper. It took five minutes,” she says.

In Kenya, by contrast, many businesses feel they have no choice but to employ a “consultant” to wait in queues and, ahem, deal with awkward officials. Others keep a low profile to avoid the predatory state. Honey Care, a Kenyan firm that sells bee hives to farmers and buys back the honey, finds it can avoid red tape by operating out in the countryside, far from the nearest bureaucrat. The downside is that there are hardly any roads.

Rich countries score better than poor ones on the IFC's measures, with Singapore pipping Hong Kong to the top slot (see chart), but there is no room for complacency. America comes fourth, yet in the past year it enacted no reforms at all in the areas “Doing Business” measures. Its tax code is as simple to understand as a thesis on post-structuralism translated into Klingon. And some American states insist on costly licences for florists, interior designers and barbers. Now there's a rule that needs trimming.